New Ways To Change LDPs

Most farmers would admit that the current loan deficiency payment (LDP) program has both pluses and minuses. In December, I sat by a farmer with a 72-bu/acre soybean yield who collected a $1.39/bu LDP. He thinks the program is great.

Two days later, I sat next to a farmer who had a 10-bu/acre yield. The amount per bushel that he collected was irrelevant.

Some might ask, “What is fair about this program?” It gets back to the original intent of the LDP program; if it was to lower corn and soybean prices, it's certainly working.

My guess is that the LDP program in corn has lowered the average selling price by about 30¢/bu. I'd argue, however, that at these low price levels, the LDP program is not helping to increase exports, but possibly to increase domestic usage.

Why? At $2/bu, I believe exports of corn are price-inelastic. Translation: Japan will likely not buy any more corn from us at $2/bu than it will at $2.30/bu. When you get into the high $2 or low $3 range, the elasticity starts to increase. But it won't at these low price levels.

On the flip side, domestic usage may increase because we see more ethanol plants being built. About 18 new plants are slated to be on line this year alone. Many are being built on the assumption that we're going to have cheap corn forever.

Sometime in the next 24 months, many farmers who've invested their own capital in ethanol plants are no longer going to know if they want the price of corn to go up or down. Ethanol plants that cash-flowed nicely at $2 might not cash-flow as well at $2.80.

Key Problems, Wild Ideas

The biggest complaints of the LDP program revolve around the timing of your LDP lock and the quantity during low-yield years. If the market is bottoming at early harvest — before the Midwestern harvest is moving — farmers in the southern Corn Belt can take advantage of the LDP. But those in the Midwest cannot. What can be done?

Consider this wild idea: Instead of basing this year's LDP on this year's yield, base it on a three-year average over the past five years, excluding the best and worst years. You get rid of that “drought” year but also get rid of the “super yield” year. By knowing the quantity that you'll be LDPing before harvest, you also eliminate the timing issue.

Why? If the quantity is known in advance, everyone can be given the opportunity to collect LDPs during the marketing year, which, for corn and soybeans, begins on Sept. 1. So by using an average of the last five years, for example, we exclude yield variance and also the timing issue.

Inherent Problems

By now you may be taking shots at this idea. There's no question there are some inherent problems:

What do you use as a proven yield? Because of the crop insurance program, a database is available, and would be less of an issue than many might assume.

How would you deal with provisions for land where crops are being rotated? If corn has been raised on a particular field for only three out of the last five years, what years do you use?

Parting Thoughts: Unfortunately, this idea is not going to be put into a new farm bill. We're too late. If we don't have a new farm bill by the time we plant this spring, however, there's always an outside chance that someone might take this into consideration.

I suggest this to you and Congressional leaders only as a beginning point for making changes in a program that has some merit, but at the same time, some deep inequities. Some of these thoughts might be a beginning for correcting those inequities.

Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visitwww.brockreport.com.